By Tiernan Ray

Shares of storage and network chip maker LSI (LSI) rose 2 cents to close at $8.47, after Morgan Stanley‘s Joseph Moore raised his rating on the stock to Overweight from Equal Weight, with a $10 price target, writing that “After some modest disappointments in 2013, we think LSI is set up for growth in 2014, with potential drivers from Hard Disk Drive share recovery, and growth in Flash Controllers and Networking.”

With the stock currently fetching 11 times his 2015 EPS estimate of 69 cents, which is unchanged today, LSI has “one of the lowest valuations in our coverage group on cross cycle estimates,” writes Moore.

Within the traditional hard disk drive controller chip business, where LSI has only one-third of the market versus two thirds for competitor Marvell Technology Group (MRVL), Moore thinks LSI has a chance to take share in the coming 12 months:

LSI is coming off a difficult year in 2013, as Marvell took away most of the Seagate notebook business, and has been gaining share within Seagate enterprise. The offset to that, the LSI wins within a new customer (we believe Western Digital in the 1 TB desktop platform), have been slow to materialize. But with management saying on the earnings call that a new customer would ship “10s of millions of units” next year (at a $3.50 or so ASP, we believe) there is likely growth potential in HDD next year. We would anticipate that this WDC share remains controversial until LSI actually shows up in teardowns, as Marvell’s execution in hard drive SOCs has been very strong over the years. But we do think that the improved profitability of the hard drive industry warrants the investment required to maintain a second source. We assume 25 mm incremental units next year at $3.50, for about 3% incremental revenue growth. We have also seen Seagate’s enterprise business oscillate between LSI and Marvell in recent years, with Marvell taking significant share in 2013. We think that Seagate plans around this oscillation to essentially have dual custom development teams at their disposal. At the 28 nm node, we do think that LSI takes some of that share back over the course of next year. Overall, we project 5% growth in LSI’s HDD business in 2014, healthy for a business that has served as the primary growth overhang on the stock.

As far as solid-state drives, or SSDs, LSI had a tough year as personal computer use of the drives remained muted because of stable pricing of flash memory chips, which held back broader adoption, he writes. And flash suppliers such as Toshiba cozied up to Apple (AAPL) and Marvell, while the third-party flash plug-in card market where lsi sells controllers came under pressure. But Moore sees brighter times for LSI in 2014 serving a bunch of companies looking for merchant silicon to act as drive controllers:

Samsung (which makes it’s own controllers) gained substantial share, shrinking the merchant market; we estimate that Samsung has just over 30% share. LSI does participate with Samsung on SATA solutions but it’s a minority of their business. But Micron, Intel, Sandisk, and Toshiba all rely on 3rd party SSD controllers (some of them SoCs from Marvell or LSI which use some of their own IP). Hynix has tried to use Linkamedia to build SSD controllers but has struggled to drive any traction in the market. The ASIC/semi-custom approach is likely to become more the norm within this space.

Lastly, Moore sees upside in LSI’s relatively new business of supplying chips to wireless base station equipment:

Looking ahead, we see LSI’s opportunity for silicon content in basestations to grow 5-7x the current data-plane + CPU solutions as customers move from DSPs toward full-custom basebands (only 2/5 of basestation OEMs use full-custom basebands today – we believe ERIC & ZTE). We believe LSI to be targeting ~40% share of the $800mm 2016 baseband SAM and 50% share of the $400mm opportunity for their Axxia products in the Transport + Control + Switch market while also gaining share in Digital Front Ends for basestations (a $400mm SAM, currently dominated by FPGA players).

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.